CHAPTER - 8

Overview of Model Tax Conventions

Section A – ICAI Study Material Questions
Question 1
Explain briefly the significant difference between the UN and OECD Model Tax Convention.

Answer
OECD Model is essentially a model treaty between two developed nations whereas UN Model is a
model convention between a developed country and a developing country.
Further, OECD Model advocates the residence principle, i.e., it lays emphasis on the right of state
of residence to tax the income, whereas the UN Model is a compromise between the source
principle and residence principle, giving more weight to the source principle as against the
residence principle.

Question 2
When does it become necessary to apply the tie-breaker rule? Discuss the manner of application of
the tie-breaker rule.

Answer
Every jurisdiction, in its domestic tax law, prescribes the mechanism to determine residential
status of a person. If a person is considered to be resident of both the Contracting States, relief
should be sought from Article 4 of the Tax Treaty. A series of tie-breaker rules are provided in
Paragraph 2 Article 4 of Model Convention to determine single state of residence for an
individual.
The tie-breaker rule would be applied in the following manner:
(i) The first test is based on where the individual has a permanent home. Permanent home
would mean a dwelling place available to him at all times continuously and not occasionally
and includes place taken on rent for a prolonged period of time.
(ii) If that test is inconclusive for the reason that the individual has permanent home available
to him in both Contracting States, he will be considered a resident of the Contracting State
where his personal and economic relations are closer, in other words, the place where lies
his centre of vital interests. Thus, preference is given to family and social relations,
occupation, place of business, place of administration of his properties, political, cultural and
other activities of the individual.
(iii) Paragraph (ii) establishes a secondary criterion for two quite distinct and different situations:
 The case where the individual has a permanent home available to him in both
Contracting States and it is not possible to determine in which one he has his centre of
vital interests;
 The case where the individual has a permanent home available to him in neither
Contracting State.
In the aforesaid scenarios, preference is given to the Contracting State where the individual has
an habitual abode.
(iv) If the individual has habitual abode in both Contracting States or in neither of them, he shall
BY CA ATUL AGARWAL (AIR-1)
AIR1CA Career Institute (ACI)
Page 8.1
 Overview of Model Tax Conventions

be treated as a resident of the Contracting State of which he is a national.

(v) If the individual is a national of both or neither of the Contracting States, the matter is left to
be considered by the competent authorities of the respective Contracting States.

Question 3
Explain the meaning of “interest” and “fees for technical services” under the UN Model Convention.

Answer
As per Article 11 of the UN Model Convention, “Interest” essentially means income from debt claims
of every kind, whether or not secured by mortgage and whether or not carrying a right to participate
in the debtor’s profits, and in particular, income from government securities and income from bonds
or debentures, including premiums and prizes attaching to such securities, bonds or debentures.
Penalty charges for late payment are not regarded as interest for the purpose of this Article.
As per Article 12A of the UN Model Convention, “Fees for technical services” is defined as payments
for managerial, technical or consultancy services but excludes payment to an employee, payment
for teaching in an educational institution or for teaching by an educational institution, payments by
an individual for services for personal use.

BY CA ATUL AGARWAL (AIR-1)

AIR1CA Career Institute (ACI)
Page 8.2